My kids bemuse me.
They are now at an age where Dad is no longer the hero. And that hurts.
This inevitably leads to copious amounts of whisky drinking. But I have noticed that when they need money, I am not just a hero but become a superhero.
But they do not know that I know what they are up to. You see this is conversation that my clients have with me all the time. Except my boys are only 12 and 14 so have not yet got the courage to ask for a house deposit but I’m aware it is just a matter of time.
Kids will either want cash for a deposit or you to act as guarantor of a loan.
And I always say no – ‘don’t do it and if you do make sure you are covered.’ But it appears this advice is falling on deaf ears because it appears mum and dad have given kids $34Bn (yes you are reading right) with an average loan of $90,000.
But I can see why. As a parent I am finding it quite tough to say no. And that is because it’s a natural thing to do. You help them out in the vague hope they will help you in later life.
But here is the truth.
- If you, yourself are still in debt, then it would not be a good idea to guarantor someone else’s debt.
And if you are approaching anything near 10 years of retirement, do you really want to be a guarantor on a loan? Probably not.
- Let’s assume your kids have found their princess or prince and want to settle down. You approve and as a gift you give them a deposit for their dream home.
A few years later you find that the beautiful princess or handsome prince tricked you and were in reality a troll resulting in divorce and they walk away with anything from 50% to 70% of your gift.
It gets worse because your kids come back to live with you and you end up doing their laundry.
Not ideal then.
So, here’s what you should do.
- Avoid being a guarantor – if your kids’ divorce you may end up with the bank nicking your home. And even if all is well there is nothing worse then having a potential loan over your head when you want to retire.
In fact, there is a suggestion that when parent guarantee loans those loans are 3 times more likely to default because kids know mum and dad will pick up the tab.
- Never gift a deposit. Give a loan and document it.
You do this for two reasons. In the event of a divorce your money is protected so the no trolls can walk away with your hard-earned cash.
Equally if your kids become a pain and stop talking to you or refuse to change your nappies like you did with them, you can always ask for your money back.
Yes, I know I sound cruel and heartless. But in an emergency on a plane, you put your own mask on first. When it comes to financial matters, put your financial mask on first, then others.
Sometimes I feel children of the current generation want everything to be in place. They ‘need’ their own room, their ‘own’ study area even their own gadgets. It must be perfect.
But when I bought my first home, it was not perfect. It meant no chai latte from the coffee shop, or even furniture. Our first coffee table was built from leftover spare glass and wood.
And in many ways that is why many can give their children a deposit they seek. They made it through sacrifice and without being perfect.
Will I, when the time comes, heed my own advice? I hope so. Because the choice will be a Porsche or being the bank of mum and dad and I have a feeling the Porsche will give me a bigger smile. It will be more fun and a less bumpy ride too.
And I know for a fact that both my boys will refuse to change my nappies.